Meeting your income tax obligations during the tax year

The number of instalments you're required to make depends on the way you choose to calculate your provisional tax instalments. If you're GST-registered, how often you file GST returns also determines how many provisional tax instalments you're required to make.

The amount of provisional tax you need to pay is based on your expected profit for the year or your GST taxable supplies (sales) and depends on the way you choose to work out your provisional tax instalments.

At the end of the year you pay or are refunded the difference between the amount of provisional tax you paid and the amount you should have paid, based on your actual profit for the year.

You may be liable for provisional tax

What residual income tax is

Residual income tax (RIT) is the amount of tax you have to pay, less any tax credits you may be entitled to (excluding working for families tax credits or other tax payments made during the year) and any PAYE deducted.

Reduction in tax rates

Changes in individual tax rates for the 2011 and 2012 income years affect how you calculate your provisional tax instalments. Because the income tax rates are lower, the provisional tax instalments may work out to be less than in previous years.
To calculate instalments payable on or after 1 October 2010 (for the 2011 income year) and for all instalments in the 2012 income year:

Take your RIT from your last income tax return less 5%.

If the result of this calculation is less than $2,500, then you will not be required to make any provisional tax payments for that income year, as you’ll be below the required threshold.

After the 2012 income year, the formula will gradually change back to normal, becoming standard in the 2014 income year.

See the table below for details:

Year for provisional tax
being calculated

Year of RIT amount used

Adjustment

2011

2009

RIT x 95%

2010

RIT x 95%

2012

2010

RIT x 95%

2011

RIT x 95%

2013

2011

RIT (no adjustment)

2012

RIT + 5%

2014

2012 (back to original calculation)

RIT + 10%

2013 (back to original calculation)

RIT + 5%

Example 1 (standard option)

During the 2010 income tax year (ie, the year ending 31 March 2010), Jenny's self-employment business:

made a profit of

$25,000

was liable for residual income tax

$4,060

As Jenny's RIT is more than $2,500, she may have to pay provisional income tax in her next income year (2011). Using the standard option, she would have calculated her provisional tax like this:

RIT

$4,060

add 5% to allow for inflation

$203

Provisional tax for 2011 income year

$4,263

With the changes to the tax rates from 1 October 2010 her provisional tax for the 2011 income year would be calculated as follows:

RIT x 95% ($4,060 x 95%)

$3,857

Provisional tax for 2011

$3,857

Jenny must pay provisional tax for the 2011 income year in three instalments as follows:

Using the standard option, he would have calculated his provisional tax like this:

RIT

$2,534.00

add 5% to allow for inflation

$ 126.70

Provisional tax for 2011-12

$2,660.70

With the changes to the tax rates from 1 October 2010, his provisional tax for the 2012 income year would be calculated as follows:

RIT x 95% ($2,534 x 95%)

$2,407.30

Provisional tax for 2011-12

$2,407.30

As this is less than $2,500, George would not be liable for provisional tax for the 2012 income year. If he expects that his RIT for the 2012 income year will exceed $2,500 he may make voluntary payments if he wishes to. See "Voluntary payments of provisional tax" below.

From the 2015 income year provisional tax assessments return to the standard rules.

Companies

If your business's income is taxed at the company rate the ratio percentage is calculated as follows:

Year

RIT previous year

RIT year before proceeding

RIT two years before proceeding

2012

(2011 RIT - 5%)
(2011 taxable supplies - asset adjustments) x 100

(2010 RIT - 5%)
(2010 taxable supplies - asset adjustments) x 100

(2009 RIT - 5%)
(2009 taxable supplies - asset adjustments) x 100

2013

(2012 RIT)
(2012 taxable supplies - asset adjustments) x 100

(2011 RIT - 5%)
(2011 taxable supplies - asset adjustments) x 100

(2010 RIT - 5%)
(2010 taxable supplies - asset adjustments) x 100

2014

(2013 RIT)
(2013 taxable supplies - asset adjustments) x 100

(2012 RIT)
(2012 taxable supplies - asset adjustments) x 100

(2011 RIT - 5%)
(2011 taxable supplies - asset adjustments) x 100

From the 2015 income year provisional tax assessments return to the standard rules.

Example (individual using ratio option)

Carl has been in business and registered for GST for the last three years. During the 2009-10 income tax year, Carl's business:

made a profit of

$60,000

was liable for RIT

$14,240

As Carl's RIT is more than $2,500, he may be assessed for provisional income tax in his next tax year. Carl meets all of the criteria to use the ratio option to calculate his provisional tax payments, and applies to us to use this before his 2010 income year starts.

We calculate Carl's ratio percentage as 5 %. This is calculated as follows:

(2010 RIT)
(2010 taxable supplies - asset adjustments) x 100

Carl's balance date is 31 March. Using the ratio option, Carl needs to make six provisional tax instalments each year.

In April and May 2010 (the first two months into Carl's 2011 income tax year), Carl's GST taxable supplies (sales) were $15,000. His first provisional tax payment for the 2011 income tax year is due 28 June 2010. It's calculated as follows:

With the changes to the tax rates from 1 October 2010, Carl’s provisional tax for the 2011 income year would be calculated as follows:

(2010 RIT - 10%)
(2010 taxable supplies - asset adjustments) x 100

This means Carl’s ratio percentage has changed from 5% to 4% effective from 1 October 2010. Multiplying these by Carl's ratio percentage of 5% (before 1 October 2010) and 4% (after 1 October 2010), his provisional tax payments are:

Payment due 28 August 2010

$1,250

Payment due 28 October 2010

$1,680

Payment due 15 January 2011

$1,400

Payment due 28 February 2011

$1,800

Payment due 7 May 2011

$1,920

Carl's provisional tax payments vary depending on his taxable supplies during the year, which helps with his cash flow.

You can make voluntary provisional tax payments

You may find it useful to make voluntary provisional tax payments. This will help to reduce the amount of income tax you have left to pay at the end of the tax year.

You can make voluntary repayments at any time. If this is before a provisional tax instalment due date, you can reduce the amount of provisional tax due by the amount of the voluntary payment.

For example, if you make a $400 voluntary payment before your provisional tax instalment is due and you calculate the amount as $1,000, you only need to pay the remaining $600 by the instalment due date.

If you're also registered for GST, you can make voluntary payments using your GST and provisional tax return (GST103).

For more information on how to make a payment to Inland Revenue, please see our Making payments section.

Provisional tax in your first year

In your first year of business you should budget and put money aside for your provisional tax. This will help ease the cash flow in your second year of business, when you'll need to pay provisional tax instalments for that year plus the tax for your first year of business. One way to spread the cost of your first year's tax is to make voluntary payments to us during your first year.

Example

Sandra started business as an electrician on 31 May 2009.

Her first business income tax return is for the year ended 31 March 2010 (ie her 2010 income year) and this is due on 7 July 2010. This income tax return shows RIT of $4,000, which is due for payment on 7 February 2011.

As her RIT is over $2,500 she will be assessed for provisional tax during her 2011 tax year.

From 1 October 2010 using the standard option, Sandra's 2011 provisional tax is $3,800 (last year's RIT less 5%). This is due in three instalments during the year.

Sandra's payments are due:

28 August 2010 (her first provisional tax instalment for the 2011 income year)

$1,400

15 January 2011 (her second provisional tax instalment for the 2011 income year)

$500

7 February 2011 (her RIT for the 2010 income year which is her first year in business)

$4,000

7 May 2011 (her third provisional tax instalment for the 2011 income year)

$1,900

Total

$7,800

From 31 May 2009 to 27 August 2010, (the due date for her first provisional instalment is 28 August 2010), Sandra had no taxes to pay. She now needs to budget for her provisional tax payments during her second year in business and for the RIT payable for her 2010 income year of $4,000 due on 7 February 2011.

Provisional tax paid is deducted from the following year's RIT which helps to manage her income tax. The balance will either be tax to pay or a refund due.

You may be charged interest

In some circumstances you may be charged interest if the provisional tax you paid is less than your RIT. If the provisional tax you pay is more than your RIT, we may pay you interest on the difference.

Tax pooling and provisional tax intermediaries' contact details

Tax pooling lets customers to pool their provisional tax payments. This enables them to offset any provisional tax underpayments by any overpayments they've made within the same pool. This reduces their exposure to use-of-money interest. The pooling arrangement is made through a commercial intermediary, who arranges for participating customers to be charged or compensated for the offset.

For more information about tax pooling contact your tax agent or a provisional tax intermediary - see below. Please note that we do not endorse any one intermediary over any other.